Unit 1 Topic 6

Question 1

What is APR?

Answer 1

Annual percentage rate - the total cost of borrowing over one year, including the interest charged and any fees.

Question 2

What does it mean to perform a balance transfer?

Answer 2

Moving the balance (total amount owed) on a card from one card provider to another.

Question 3

What is the CVV (card verification value)?

Answer 3

Three numbers on the back of a credit or debit card. This is a security measure designed to prevent fraudulent use of the card by someone other than the card holder.

Question 4

What is a cashback card?

Answer 4

A type of card that gives back to the cardholder a percentage of the value of transactions made with the card in the form of cash.

Question 5

What is a charge card?

Answer 5

A credit card that must be repaid in full every month.

Question 6

What is meant by consumer credit?

Answer 6

Another term used for borrowing.

Question 7

Explain the cost of borrowing

Answer 7

Also called ‘cost of credit’. This is the total amount that the borrower will be charged including interest and any fees. For person loaned and credit card borrowing the cost over a 12 month period must be quoted - the APR.

Question 8

What is a credit agreement?

Answer 8

The formal agreement between a provider and a borrower setting out the amount borrowed, the interest charged, the arrangements for repayment and any other terms and conditions.

Question 9

What is a credit card?

Answer 9

A card that allows the holder to make purchases face-to-face, online or over the phone, and to withdraw cash from an ATM. Unlike a debit card, where the money is taken from the holder’s own account, transactions are paid by the card provider. The card holder relays the amount owed to the provider either in one payment or instalments. The provider charges interest on cash withdrawals from the time the withdrawal is made and on purchases after a certain period.

Question 10

What is credit history?

Answer 10

A record of money borrowed and repaid by an individual. These records are held by credit reference agencies and providers will check the individual’s credit history when a prospective customer applies for a borrowing product.

Question 11

What is a credit union?

Answer 11

A mutual organisation that provides a range of financial products to members, eg savings accounts and personal loans. Members of a credit union must share a common bond.

Question 12

What is EAR?

Answer 12

Equivalent annual rate - the cost of borrowing using an overdraft.

Question 13

What is a mortgage?

Answer 13

A loan taken out to pay for property, usually over a long term such as 25 years.

Question 14

What is a payday loan?

Answer 14

A loan designed to be taken out only for a very short period, which charges a very high APR.

Question 15

Describe payment allocation

Answer 15

The order in which a card provider uses money paid into an account to pay off the amount outstanding.

Question 16

What is a personal loan?

Answer 16

A product that allows someone to borrow a fixed amount over a fixed period at a fixed rate of interest.

Question 17

What is a store card?

Answer 17

A card issued by a retailer that the holder can use to make purchases within that store or group of stores. As with a credit card, the amount owing is paid off at a later date, either in one payment or in instalments, and interest is charged on the amount owed.

Question 18

Explain borrowing that’s unsecured

Answer 18

The provider doesn’t have rights over any of the borrower’s goods if the borrower cannot repay the debt.

Question 19

Name 2 examples of informal borrowing

Answer 19

Between family
Between friends

Question 20

You have to be aged 18 years or older before you can borrow from a provider. True or false?

Answer 20

True

Question 21

What is the term for the contract entered between a borrower and a provider?

Answer 21

A credit agreement

Question 22

Name 4 factors to consider when borrowing money

Answer 22

What they can afford to repay
The costs and risks of different borrowing methods
How long they need to borrow for
How they apply for and manage the debt

Question 23

Name 3 factors that a provider would take into account before making a product available

Answer 23

The type of borrowing
The personal financial circumstances of the borrower
Their history of repaying previous borrowing products

Question 24

Describe a ‘cooling off’ period

Answer 24

A ‘cooling off’ period is a 14 day period where people who take out credit cards or personal loans have time to change their minds, cancel the agreement and return the card or the loan without any penalties.

Question 25

How long does a ‘cooling off’ period last for?

Answer 25

The ‘cooling off’ period lasts for 14 days and starts from the date that the loan agreement was signed or the date that the customer received a copy of the agreement, whichever is later.

Question 26

What do the regulations that implement the consumer credit directive 2008 require providers to quote?

Answer 26

An APR in adverts for borrowing products.

Question 27

How often are overdraft interest rates calculated?

Answer 27

On a daily basis.

Question 28

Name a cost of going overdrawn

Answer 28

Unpaid transaction fee.

Question 29

Name 3 ways in which current account holders can avoid unauthorised overdraft costs

Answer 29

Sign up for an alert service from their bank that sends a text message when the account balance is below a set amount or a large transaction has been received for payment

Check their account balance regularly

Choose a basic bank account as their current account

Question 30

Name the 4 parties that are involved when people use a credit card

Answer 30

The cardholder
The merchant
The merchant’s bank (the acquirer)
The cardholder’s bank (the issuer)

Question 31

A typical credit card offers interest free credit for up to 56 days (depending on when the next statement is due). True or false?

Answer 31

True

Question 32

Name 4 fees that can be charged on a credit card

Answer 32

Annual subscription fees

Late payment fees charged when the cardholder doesn’t make any repayments by the payment due date on the statement

Over-limit fees charged when the cardholder makes transactions that take the total amount borrowed over their credit limit

Cash advance fee charged when cash is withdrawn on the card

Question 33

Name the 7 types of credit card

Answer 33

Low APR Cards

Cashback Cards

Reward Cards

Charity donation cards

First credit cards

Cards with low costs for foreign transactions

Gold, Platinum and Black credit cards

Question 34

Who are low APR card usually available to?

Answer 34

People with a certain level of income and/or a good history of repaying borrowing on time.

Question 35

Who are low APR cards attractive to?

Answer 35

People who want to borrow and spread the cost of repayment over several months because the interest charged is lower compared to other credit cards.

Question 36

Why’re people who have never had a credit card before likely to be offered a higher APR and lower credit limit than others?

Answer 36

Because the issuer doesn’t know how they’d manage their borrowing.

Question 37

Who are Gold, Platinum and Black credit cards offered to?

Answer 37

People on higher incomes.

Question 38

Name 2 benefits of Gold, Platinum and Black credit cards

Answer 38

Travel Insurance

Entry to exclusive airport lounges

A personal assistant service

Question 39

Why do APRs charged on credit cards tend to be higher than those charged on a loan?

Answer 39

Because it’s more risky for the provider.

Question 40

Name the type of credit card that doesn’t charge interest and doesn’t have an APR

Answer 40

Charge Cards

Question 41

What is a fixed APR?

Answer 41

A fixed APR is an interest rate that is guaranteed not to change during the life of the loan or credit facility.

Question 42

Name one factor that may affect the rate of the APR a lender is charged

Answer 42

How much you want to borrow.

Question 43

Name 5 factors to consider when choosing a product

Answer 43

How much they wish to borrow
What they can afford to repay
When they plan to repay
What the different borrowing options are
What the costs of the different options are

Question 44

State 3 advantages of using credit cards

Answer 44

Offered by a range of providers
Accepted by most providers
Chip+pin identification and CVV (security)
Wide variety of cards
Allows people to borrow without added interest

Question 45

Name 3 disadvantages of using credit cards

Answer 45

Potential for extra charges
Potential risk of getting trapped in debt
Limited use (drawing cash may cost a fee)
Could potentially damage credit score